Massive penalty awaits guar traders

To ensure the violation of norms seen in guar trade is not repeated in the case of other agri commodities, the Forward Markets Commission (FMC) plans to impose a heavy penalty on a number of traders for violating clubbing guidelines and artificially manipulating prices.

The commodity derivatives market regulator has sought bank account statements from leading guar traders. Currently, it is analysing the statements. “We have discovered a violation of clubbing guidelines, prima facie, in our initial investigation. On aggregating traders’ position, we found they had booked guar in various names beyond the permissible limit. Hence, we are just working on the quantum of the penalty to be imposed on them, and this may run into crores,” said a senior FMC official.

The Forward Contract (Regulation) Act does not specify any cap on the monetary penalty the regulator can impose. Therefore, the FMC can levy a penalty in tune with the violation of norms, including periodic suspension of membership, in addition to monetary penalty. The regulator can levy a fine of about Rs 10,000 on those who violated clubbing guidelines (open position limits), as specified by the National Commodities and Derivatives Exchange, vide a circular dated July 31, 2006.

In May, an FMC investigation showed 4,490 entities were involved in guar price manipulation, which led to benefits worth Rs 1,291 crore for these traders. While the Ministry of Consumer Affairs hasn't taken any concrete measure on the violators of FMC guidelines yet, the commission's departmental investigations into the matter have continued.

In March, a report by the Associated Chambers of Commerce and Industry of India (Assocham) said guar gum and guar seed prices had jumped about 70 per cent between January and March, despite several measures such as high margins, lower position limits, suspension of traders, etc, taken by the regulator. In the past year, the prices of these commodities rose tenfold, owing to low stocks. The standard price of guar bean is Rs 10 a kg, while guar seed is traded at about Rs 150 a kg and guar gum at Rs 500 a kg.

Earlier, the FMC had suspended futures trading in both guar seed and gum until September, which was then extended indefinitely. In a circular, the FMC warned commodity exchanges not to launch new contracts without its approval.

Meanwhile, Assocham had cautioned the government against re-listing guar gum and guar seeds in the futures market till the Forward Contract Regulation Amendment (FCRA) Bill was introduced to empower FMC to regulate the market and penalise insider trading, cartelisation and price manipulations. It said in 2010-11, there was a bumper crop of 15,45,000 tonnes and the price during the year ranged from Rs 2,000 to Rs 3,800 a quintal. In 2011-12, the guar crop was estimated at 12,00,000 tonnes and the guar price rose from Rs 4,000 in October 2011 to Rs 29,000 a quintal in March 2012, a rise of 625 per cent.

Though the increase in demand is said to be export-led, such an abnormal price rise cannot be easily attributed to a rise in export demand alone; there is a possibility of price manipulation and insider trading, owing to the lack of corresponding trading volumes and negligible open interest in the market. In 2011-12, the price rise (returns) in the futures market is about 10 times higher than last year's and the steepest rise for any agri commodity in the history of Indian futures exchanges.

Futures price change volatility (return volatility) in 2011-12 rose about 80 per cent compared to 2010-11. Guar futures prices ranged between Rs 2,743 and Rs 29,900 a quintal. In 2011-12, the highest price was 889 per cent higher than in 2010-11.

Now, despite a 40-member advisory committee headed by FMC Chairman Ramesh Abhishek recommending re-start guar contracts on exchange platforms, the regulator seems to be in no rush. The commission is waiting to set up a sub-committee to analyse the need of the re-launch and provide the report to the advisory committee. As a result, it is unlikely guar contracts would be traded on exchange platform this season.